Many companies are deciding to sell non-performing accounts in order to convert aging balances into a capital infusion.
However, is it always the right move for a business to sell these debts?
In the following article, Canaccede Financial Group reviews that the first step of the process is to determine how much these overdue accounts are costing the company. Consider how much time and effort the team is devoting to managing and chasing these accounts. A “back of the envelope” calculation will provide business owners with an estimate of these total costs.
Next, the company will want to determine how many of these accounts are eventually being recovered, and what percentage of the balance is actually being paid. Many businesses make the mistake of not performing these calculations and accounting for settlements, discounts, and other adjustments when trying to establish their recovery rate.
Calculate the gross recoveries, less the costs spent on conducting collection operations to determine how to effectively treat these non-performing accounts. Additionally, analyze the total recoveries the agency collects, minus their fees and the costs of managing the accounts if utilizing external collection agencies.
Valuing the Accounts
Businesses must submit all essential data in order to receive the most precise assessment of the value of the accounts to be placed. Determinants will include the aging of balances, outstanding amounts, and whether any portion of the debt is contested by a customer or end-user.
What prior attempts were made to recover these accounts, and are there any regional or industry-specific account details that may be useful? The more precise the information, the better a debt buyer can assign a genuine value of the underperforming accounts.
Important Questions to Ask the Debt Buyer
- Do they have the required financial means to back their bid?
- What transactions have they completed – do they have a consistent track record of honoring bids and carrying out agreed purchases?
- Do they have rules and processes in place regarding their collecting activities and the protection of consumer information?
- What is their track record in defending a client’s brand?
- What type of after-sales service will they require? Can they ensure that all interactions are coordinated centrally?
- Are references and testimonials available?
- Do they keep these receivables or sell them to a third party?
What to Look for in a Debt Buyer
- Do they have enough liquidity and a strong enough financial position to be a trustworthy partner who provides quality service and communications?
- Do they have the necessary expertise and versatility to tailor solutions to specific requirements?
- Will they be able to regularly honor pledged purchases and service clients in a way that is compliant with regulations and maintains the business’s reputation after the transaction?
- Do they have acceptable service standards in place, as well as strict regulations and procedures?
- Do they have the analytical abilities to provide optimal and long-term pricing?
- Are they devoted to serving clients rather than merely earning a profit?
What to Consider
Various considerations come into play when selling non-performing accounts. Business owners must understand the cost these difficult-to-resolve accounts impose on the company and assess the net recovery rate.
If the collection procedure is resulting in financial losses, gathering all necessary information becomes imperative. Lastly, it is crucial to select a buyer who can provide optimal services for the business.
By understanding the costs involved, assessing the net recovery rate, and gathering essential information, business owners can make informed decisions.
Furthermore, selecting a buyer that can continually collect on future accounts becomes paramount to ensure a successful outcome in the future. Taking these considerations into account will help business owners navigate the process of selling non-performing accounts with confidence and strategic foresight.